DOLPHIN ENTERTAINMENT, INC. The objectives of our Management's Discussion and Analysis of Financial
Condition and Results of Operations are to provide users of our consolidated
financial statements with a narrative explanation from the perspective of
management of our financial condition, results of operations, cash flows,
liquidity and certain other factors that may affect future results. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our Consolidated Financial
Statements and related Notes included elsewhere in this Annual Report on Form
10-K. This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The forward-looking statements are not
historical facts, but rather are based on current expectations, estimates,
assumptions and projections about our industry, business and future financial
results. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed in other sections of this Annual Report on Form 10-
Overview
We are a leading independent entertainment marketing and premium content
development company. We were first incorporated in the
On
Through our subsidiaries 42West,
We have established an acquisition strategy based on identifying and acquiring companies that complement our existing entertainment publicity and marketing services and content production businesses. We believe that complementary businesses, such as live event production, can create synergistic opportunities and bolster profits and cash flow. We have identified potential acquisition targets and are in various stages of discussion with such targets. We intend to complete at least one acquisition during 2022, but there is no assurance that we will be successful in doing so, whether in 2022 or at all.
We have also established an investment strategy, "Dolphin 2.0," based upon identifying opportunities to develop internally owned assets, or acquire ownership stakes in others' assets, in the categories of entertainment content, live events and consumer products. We believe these categories represent the types of assets wherein our expertise and relationships in entertainment marketing most influences the likelihood of success. We are in various stages of internal development and outside conversations on a wide range of opportunities within Dolphin 2.0. We intend to enter into additional investments during 2022, but there is no assurance that we will be successful in doing so, whether in 2022 or at all.
18 COVID Update
During
The extent to which the COVID-19 pandemic affects our business, operations and financial results depends, and will continue to depend, on numerous evolving factors that we may not be able to accurately predict. Since the outbreak of COVID-19 began and public and private sector measures to reduce its transmission were implemented, such as the imposition of social distancing and orders to work-from-home, stay-at-home and shelter-in-place, the demand for certain of the services the Company offers was adversely affected resulting in decreased revenues and cash flows.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, direct costs, payroll and benefits, selling, general and administrative expenses, legal and professional expenses, other income/expense and net income. Other income/expense consists mainly of interest expense, non-cash changes in fair value of liabilities, costs directly relating to our acquisitions, and gains or losses on extinguishment of debt and disposal of fixed assets.
We operate in two reportable segments: our entertainment publicity and marketing
segment and our content production segment. The entertainment publicity and
marketing segment is composed of 42West, The Door,
Revenues
For the years ended
The table below sets forth the percentage of total revenue derived from our two
segments for the years ended
For the years ended
December 31,
2021 2020
Revenues:
Entertainment publicity 99.9 % 99.6 %
Content production 0.1 % 0.4 %
Total revenue 100.0 % 100.0 %
Entertainment Publicity and Marketing ("EPM")
Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we have a stable client base, and we have continued to grow organically through referrals and actively soliciting new business, as well as through acquisition of new businesses within the same industry. We earn revenues primarily from the following sources: (i) celebrity talent services; (ii) content marketing services under multiyear master service agreements in exchange for fixed project-based fees; (iii) individual engagements for entertainment content marketing services for durations of generally between three and six months; (iv) strategic communications services; (v) engagements for marketing of special events such as food and wine festivals; (vi) engagement for marketing of brands; (vii) arranging strategic marketing agreements between brands and social media influencers and (viii) content productions of marketing materials on a project contract basis. For these revenue streams, we collect fees through either fixed fee monthly retainer agreements, fees based on a percentage of contracts or project-based fees.
19
We earn entertainment publicity and marketing revenues primarily through the following:
· Talent - We earn fees from creating and implementing strategic communication
campaigns for performers and entertainers, including Oscar, Tony and Emmy winning film, theater and television stars, directors, producers, celebrity chefs andGrammy winning recording artists. Our services in this area include ongoing strategic counsel, media relations, studio and/or network liaison work, and event and tour support.
· Entertainment Marketing and Brand Strategy - We earn fees from providing
marketing direction, public relations counsel and media strategy for entertainment content (including theatrical films, television programs, DVD and VOD releases, and online series) from all the major studios, as well as content producers ranging from individual filmmakers and creative artists to production companies, film financiers, DVD distributors, and other entities. In addition, we provide entertainment marketing services in connection with film festivals, food and wine festivals, awards campaigns, event publicity and red-carpet management. As part of our services, we offer marketing and publicity services tailored to reach diverse audiences. We also provide marketing direction targeted to the ideal consumer through a creative public relations and creative brand strategy for hotel and restaurant groups. Our clients for this type of service include major studios, streaming services, independent producers and leading hotel and restaurant groups. We expect that increased digital streaming marketing budgets at several large key clients will drive growth of revenue and profit in 42West's Entertainment Marketing division over the next several years.
·
raise or reposition their public profiles, primarily in the entertainment industry. We believe that growth inStrategic Communications division will be driven by increasing demand for these services by traditional and non-traditional media clientswho are expanding their activities in the content production, branding, and consumer products PR sectors. We expect that this growth trend will continue for the next three to five years. We also help studios and filmmakers deal with controversial movies, as well as high-profile individuals address sensitive situations.
· Creative Branding and Production- We offer clients creative branding and
production services from concept creation to final delivery. Our services include brand strategy, concept and creative development, design and art direction, script and copyrighting, live action production and photography, digital development, video editing and composite, animation, audio mixing and engineering, project management and technical support. We expect that our ability to offer these services to our existing clients in the entertainment and consumer products industries, will be accretive to our revenue.
· Digital Media Influencer Marketing Campaigns - We arrange strategic marketing
agreements between brands and social media influencers, for both organic and
paid campaigns. We also offer services for social media activations at events,
as well as editorial work on behalf of brand clients. Our services extend
beyond our own captive influencer network, and we manage custom campaigns
targeting specific demographics and locations, from ideation to delivery of
results reports. We expect that our relationship with social media influencers
will provide us the ability to offer these services to our existing clients in
the entertainment and consumer products industries and will be accretive to our
revenue.
Content Production ("CPD")
We have a team that dedicates a portion of its time to identifying scripts, story treatments and novels for acquisition, development and production. The scripts can be for either digital or motion picture productions. We have acquired the rights to certain scripts that we intend to produce and release in the future, subject to obtaining financing. We have not yet determined if these projects would be produced for digital, television or theatrical distribution.
20
We have completed development of some of these projects, which means that we have completed the script and can begin pre-production once financing is obtained. We are planning to fund these projects through third-party financing arrangements, domestic distribution advances, pre-sales, and location-based tax credits, and if necessary, sales of our common stock, securities convertible into our common stock, debt securities or a combination of such financing alternatives; however, there is no assurance that we will be able to obtain the financing necessary to produce any of these feature films.
Expenses
Our expenses consist primarily of:
(1) Direct costs - include certain cost of services, as well as certain
production costs, related to our entertainment publicity and marketing
business. Included within direct costs are immaterial impairments for any of
our content production projects that are abandoned.
(2) Selling, general and administrative expenses - include all overhead costs
except for payroll, depreciation and amortization and legal and professional
fees that are reported as a separate expense item.
(3) Depreciation and amortization - include the depreciation of our property and
equipment and amortization of intangible assets and leasehold improvements
(4) Change in fair value of contingent consideration - includes the changes to
the fair value of contingent consideration liabilities related to our
acquisitions of The Door, Be Social and B/HI subsequent to their initial
measurement.
(5) Legal and professional fees - include fees paid to our attorneys, fees for
investor relations consultants, audit and accounting fees and fees for
general business consultants.
(6) Payroll expenses include wages, payroll taxes and employee benefits.
Other Income and Expenses
For the years ended
RESULTS OF OPERATIONS
Year ended
Revenues
For the years ended
For the year ended
December 31,
2021 2020
Revenues:
Entertainment publicity and marketing $ 35,705,305 $ 23,946,680
Content production 21,894 107,800
Total revenue $ 35,727,199 $ 24,054,480 Revenues from entertainment publicity and marketing increased by approximately
21
We derived immaterial revenues from the content production segment for the years
ended
Expenses For the years endedDecember 31, 2021 and 2020, our operating expenses were as follows: For the year ended December 31, 2021 2020 Expenses: Direct costs$ 3,879,409 $ 2,576,709 Payroll and benefits 23,819,327 15,990,702 Selling, general and administrative 5,836,235 4,822,130 Change in fair value of contingent consideration 3,754,221 55,000 Depreciation and amortization 1,905,354 2,030,226 Legal and professional 2,013,436 1,191,231 Total expenses$ 41,207,982 $ 26,665,998
Direct costs are mainly attributable to the EPM segment and increased by
approximately
Payroll and benefit expenses increased by approximately
Selling, general and administrative expenses increased by approximately
The increase are primarily related to the year ended
·
·
·
·
amount of travel for the year ended 2020; and
·
These increases were partially offset by:
·
year endedDecember 31, 2020 was higher resulting from the impact of COVID-19.
Contingent consideration related to our acquisitions of The Door, Be Social and
B/HI was recorded at fair value on our consolidated balance sheet as of the
respective acquisition dates. The fair value of the related contingent
consideration is measured at every balance sheet date and any changes recorded
on our consolidated statements of operations. The fair value of the contingent
consideration increased by approximately
Depreciation and amortization had a small decrease of
Legal and professional fees increased by approximately
22
Other Income and Expenses
For the year ended
December 31,
2021 2020
Other Income and expenses:
Gain on extinguishment of debt $ 2,988,779 $ 3,311,198
Loss on the deconsolidation of Max Steel VIE - (1,484,591 )
Change in fair value of convertible notes and derivative liabilities
(570,844 ) (534,627 )
Change in fair value of warrants (2,482,877 ) (275,445 )
Change in fair value of put rights (71,106 ) 1,745,418
Acquisition costs (22,907 ) (93,042 )
Interest expense and debt amortization (785,209 ) (2,133,660 )
Total $ (944,164 ) $ 535,251 During the year ended
We elected the fair value option for certain convertible notes issued in 2020.
The embedded conversion feature of a convertible note issued in 2019 met the
criteria for a derivative. The fair value of these convertible notes and
embedded conversion feature are remeasured at every balance sheet date and any
changes are recorded on our condensed consolidated statements of operations. For
the year ended
Warrants issued with convertible notes payable issued in 2020, were initially
measured at fair value at the time of issuance and subsequently remeasured at
estimated fair value on a recurring basis at each reporting period date, with
changes in estimated fair value of each respective warrant liability recognized
as other income or expense. In
The fair value of put rights related to the 42West acquisition were recorded on
our consolidated balance sheet on the date of the acquisition. The fair value of
the put rights are measured at every balance sheet date and any changes are
recorded on our consolidated statements of operations. The fair value of the put
rights increased by approximately
23
Acquisition costs consisted primarily of legal, consulting and auditing costs
related to our acquisitions. Acquisition costs for the year ended
Interest expense and debt amortization expense decreased by
Income Tax Benefit
We had an income tax expense of
As of
In assessing the ability to realize the deferred tax assets, we consider whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of the deferred tax asset is
dependent upon the generation of future taxable income during the periods in
which these temporary differences become deductible. We believe it is more
likely than not that the deferred tax asset will not be realized and we have
accordingly recorded a full valuation allowance as of both
Net Loss
Net loss was approximately
Net loss was approximately
Net loss for the years ended
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Year Ended December 31,
2021 2020
Statement of Cash Flows Data:
Net cash used in operating activities $ (1,318,717 ) $ (1,506,311 )
Net cash used in investing activities (3,025,856 ) (1,375,969 )
Net cash provided by financing activities 3,937,823 8,609,318
Net (decrease) increase in cash and cash equivalents and restricted cash
(406,750 ) 5,727,038
Cash and cash equivalents and restricted cash, beginning of period
8,637,376 2,910,338
Cash and cash equivalents and restricted cash, end of
period $ 8,230,626 $ 8,637,376
24
Operating Activities
Net cash used in operating activities was
Our net loss of
· $6.9 million of non-cash changes in the fair value of liabilities;
· $0.5 million of non-cash items such as impairments, bad debt expense
and other non-cash losses;
· $2.0 million of non-cash lease expense; and
· $2.2 million of depreciation and amortization and other items such as
impairments of fixed assets and capitalized production costs.
The above were offset by:
· $3.1 million of a gain on extinguishment of debt, primarily related to
the forgiveness of PPP Loans; and
· $3.3 million of changes in operating assets and liabilities.
Our net loss of
· $1.5 million of the loss on deconsolidation of Max Steel VIE
· $1.3 million of the recognition of the beneficial conversion feature of
convertible notes payable
· $0.8 million of non-cash items such as impairments, bad debt expense
and other non-cash losses;
· $1.8 million of non-cash lease expense; and
· $2.1 million of depreciation and amortization and other items such as
impairments of fixed assets and capitalized production costs.
The above were offset by:
· $3.3 million of a gain on extinguishment of debt, primarily related to
the Max Steel VIE;
· $2.9 million of changes in operating assets and liabilities.
· $0.9 million of non-cash changes in the fair value of liabilities;
Investing Activities
Net cash used in investing activities for the year ended
Net cash used in investing activities for the year ended
Financing Activities
Net cash provided by financing activities was
Net cash flows provided by financing activities for the year ended
Inflows: ·$6.0 million of proceeds from convertible notes payable 25
Outflows: ·$1.0 million from the exercise of put rights; ·$0.9 million of repayment of the term loan; and ·$0.1 million of repayment of notes payable
Cash flows provided by financing activities for the year ended
Inflows:
· $7.6 million of proceeds from the sale of Common Stock through
registered direct offering;
· $3.7 million proceeds from convertible notes payable; and
· $2.8 million of proceeds from PPP Loans.
Outflows:
· $1.6 million from the exercise of put rights;
· $1.9 million of repayment of convertible notes;
· $1.0 million of installment payments to sellers on Shore Fire and
Viewpoint acquisitions;
·
· $0.5 million of repayment of the line of credit;
· $0.3 million of repayment of the term loan; and
· $0.1 million of repayment of notes payable.
Going Concern Update
In previous years, we had determined there were factors that raised substantial
doubt about the Company's ability to continue as a going concern. Throughout the
past years, we have taken measures to strengthen our financial position, which
is evidenced by a positive working capital for three straight quarters, as of
Further, on
Management believes that our cash position, together with the forecasted cash flows and the availability of funds through the LP 2021 Purchase Agreement, is sufficient to meet capital and liquidity requirements for at least the next 12 months and thereafter for the foreseeable future. As a result, there is no longer substantial doubt about the Company's ability to continue as a going concern.
Debt and Financing Arrangements
As described below in further detail, throughout the year ended
Our debt obligations in the next twelve months from
26 Term Loan
Two of our subsidiaries, as co-borrowers, entered in into a three-year term loan
in March of 2020, which required monthly repayment of principal and interest and
was to mature on
2021 Lincoln Park Transaction
On
On
Convertible Notes Payable
During the year ended
During the year ended
As of
It is our experience that convertible notes, including their accrued interest are converted into shares of the Company's common stock and not settled through payment of cash. Although we are unable to predict the noteholder's intentions, we do not expect any change from our past experience.
Convertible Notes Payable at Fair Value
We had convertible promissory notes outstanding with aggregate principal amounts
of
During the year ended
Similar to the Convertible notes discussed above, our historical experience has been that these convertible notes are converted into shares of the Company's common stock prior to their maturity date and not settled through payment of cash.
27
Nonconvertible Promissory Notes
As of
Convertible Notes Receivable
We hold convertible notes receivable from
The Crafthouse Cocktails note amounts to
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements.
We consider the fair value estimates, including those related to acquisitions, valuations of goodwill, intangible assets, acquisition-related contingent consideration and convertible debt to be the most critical in the preparation of our consolidated financial statements as they are important to the portrayal of our financial condition and require significant or complex judgment and estimates on the part of management. Further details on each item are discussed below. See Note 18 - Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.
Goodwill
28
For purposes of the annual assessment, management initially performs a qualitative assessment, which includes consideration of the economic, industry and market conditions in addition to our overall financial performance and the performance of these assets. If our qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, we perform a quantitative analysis. In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections. Assumptions used in our impairment testing are consistent with our internal forecasts and operating plans. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment. If not, we recognize an impairment equal to the difference between the carrying amount of the reporting unit and its fair value, not to exceed the carrying amount of goodwill.
Intangible assets
In connection with the acquisitions of 42West, The Door, Viewpoint,
Intangible assets are initially recorded at fair value and are amortized using the straight-line method over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If a triggering event has occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, the asset would not be deemed recoverable. Impairment would then be measured as the excess of the asset's carrying value over its fair value. See Note 7 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. Events or circumstances that might require impairment testing include the loss of a significant client or clients, the identification of other impaired assets within a reporting unit, loss of key personnel, the disposition of a significant portion of a reporting unit, significant decline in stock price or a significant adverse change in business climate or regulations.
Business Combinations and Contingent Consideration
The determination of the fair value of net assets acquired in a business combination and specifically the estimates of acquisition-related contingent consideration (sometimes referred to as "earn-out liabilities") requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using expected cash flows and industry-standard valuation techniques. Fair values of earn-out liabilities are estimated using income approaches such as discounted cash flows or option pricing models.
Due to the time required to gather and analyze the necessary data for each
acquisition,
Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect our operating results in the period such changes are recognized.
Convertible debt
The terms of our convertible debt agreements are evaluated to determine whether the convertible debt instruments contain both liability and equity components, in which case the instrument is a compound financial instrument. Convertible debt agreements are also evaluated to determine whether they contain embedded derivatives, in which case the instrument is a hybrid financial instrument. Judgement is required to determine the classification of such financial instruments based on the terms and conditions of the convertible debt agreements.
29
Estimation methods are used to determine the fair values of the liability and equity components of compound financial instruments and to determine the fair value of embedded derivatives included in hybrid financial instruments. Fair values of convertible debt are estimated using pricing models such as the Monte Carlo Simulation. Evaluating the reasonableness of these estimations and the assumptions and inputs used in the valuation methods requires a significant amount of judgement and is therefore subject to an inherent risk of error. See Notes 14 - Convertible Notes Payable At Fair Value and 18 - Fair Value Measurements in the notes to the audited consolidated financial statements, included elsewhere in this Annual Report on Form 10-K, for information pertaining to acquisition-related fair value adjustments.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
© Edgar Online, source
